This is the time when stock-pickers think about their favourite shares to buy for the coming year. After a stormy 2020-21, this is no easy task. Furthermore, with monetary policy tightening and interest rates set to rise, things might get nervy for investors globally. Nevertheless, I’ll stick my neck out by revealing three companies I’d back for market-beating future returns. Each of these stocks are large-cap FTSE 100 shares that I’d expect to weather the worst storms. I don’t own any of these shares, but I’d happily buy all three today.

#1 best stock to buy: British American Tobacco

As I expect stocks to be quite volatile next year, I’m looking for shares that — in my view — are solid enough to weather stormy conditions. Thus, the first of my stocks to buy for 2022 is tobacco titan British American Tobacco (LSE: BATS). As a leading manufacturer of tobacco, cigarettes and smoking products, BAT isn’t popular with ethical investors. But its huge cash flows enable its to pay massive cash dividends to shareholders. On Friday, it closed at 2,758.96p, up 67.96p (+2.5%), valuing the group at a hefty £63.3bn. At present, the shares trade on a price-to-earnings ratio of 10.2 and an earnings yield of 9.8%. What’s more this FTSE 100 giant’s shares offer a dividend yield of 7.8% a year — almost double the Footsie’s 4%. For me, BAT is a solid stock, even though the group does have a towering £40.5bn of net debt on its balance sheet.

#2 top stock: Unilever

When I contemplate safe, solid stocks, consumer-goods colossus Unilever (LSE: ULVR) often springs to mind. Its steady, solid business model appeals to me. It sells hundreds of popular brands, servicing 2.5bn people every day. In effect, one in three people on the planet is a Unilever customer. Wow. On Friday, Unilever’s share price closed at 4,020p, gaining 38p (+1%), valuing this FTSE 100 super-heavyweight at £102.6bn. But the second of my picks has been in decline since summer 2019, when it hit a record closing high of 5,324p on 4 September 2019. Currently, the shares trade at a discount of roughly £13 from their peak. They trade on a chunky multiple of 22.8 times earnings and offer an earnings yield of 4.4%. Plus ULVR’s dividend yield is 3.7% a year. The company’s sales growth has been slowing, but I’d hope to see it rebound in 2022-23.

#3 recovery share: Lloyds Banking Group

The third of my stocks is a recovery play. Lloyds Banking Group (LSE: LLOY) is Britain’s largest retail bank, serving 30m customers. Thus, its fate is closely tied to spending and borrowing by consumers and businesses. On Friday, Lloyds shares closed at 46.42, losing 0.27p (-0.6%), valuing the Black Horse bank at £33bn. But as fears over Covid-19 rose and fell, Lloyds’ share price ranged from 32p on 21 December 2020 to 51.58p on 2 November 2021. For me, Lloyds is a binary bet on the war against coronavirus. If the UK conquers Covid-19, then Lloyds’ prospects should improve markedly, but viral setbacks could harm the bank’s future. Right now, this stock trades at 7.1 times earnings, for an earnings yield of 14.1%. The dividend yield (axed in 2020 and later restored) is 2.7% a year. I hope humanity and Lloyds both bounce back strongly in 2022!

Cliffdarcy has no position in any of the shares mentioned. The Motley Fool UK has recommended British American Tobacco, Lloyds Banking Group, and Unilever. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services, such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool, we believe that considering a diverse range of insights makes us better investors.

Almost two months ago, I suggested that the Deliveroo (LSE: ROO) share price could stage a brief rally as the firm reported on earnings over its third quarter. This duly happened. At the same time however, I also felt the takeaway delivery firm was in no way a bargain due to the many headwinds it faced. 

Post mini recovery, the valuation of Deliveroo has dropped back again. In fact, it’s now hit levels not seen since the end of April, following its disastrous IPO. Could it fall further moving into 2022? And would I be a buyer if it did?

Gig workers rule

The latest obstacle faced by the company is news that the European Commission has drafted news rules for gig workers. These would compel firms like Deliveroo to classify their drivers and riders as employees, entitling them to a minimum wage, pension and paid holidays. To date, these businesses have regarded workers as independent contractors.

As you might expect, such a move would mean far higher costs for ROO and its rivals. And while some of this can be passed on to the customer, there’s clearly a limit on what they’ll be prepared to pay.

Right now, nothing is set in law. However, the 20% fall in the Deliveroo share price in the last month suggests investors are once again wary. 

Will the Deliveroo share price fall further?

There’s certainly nothing to stop things from getting worse before they get better. It’s not just the threat of new legislation either. Like many highly-valued stocks across the pond, Deliveroo remains unprofitable. That could prove very unattractive to investors if inflation were to force a hike in interest rates. Even if this doesn’t happen soon, the sheer amount of competition Deliveroo faces can’t be ignored. If it possesses an economic moat, I’m struggling to see it.

It’s also worth mentioning that Deliveroo’s free float (the number of shares available on the market) is pretty low for a company of its size, at just 70%. This means its stock has the potential to be more volatile than other UK heavyweights. 

Reasons to be cheerful

Of course, no one has a crystal ball. While my call in October turned out pretty well, it was little more than educated guesswork. And there are certainly reasons for thinking the Deliveroo share price could stage another recovery as we move into 2022.

The emergence of the Omicron variant, for example, has already pushed the number of people dining out down to its lowest levels since May. That could/should be beneficial to Deliveroo, just as it was during the three national lockdowns. People still need to eat and a takeaway is an affordable luxury to raise the spirits in the dead of winter.

It’s also worth highlighting that, due to legal challenges, it will probably be a good while before Deliveroo needs to factor the aforementioned gig worker rules into its business plan. This delay could prove profitable for traders, albeit less so for long-term investors like me. 

Still overvalued

To be clear, I’ve nothing against Deliveroo as a company. I’ve used its services on a few occasions and been more than satisfied. At £4bn, however, it still looks overvalued to me. Lose another 50% and that view might change. For now, I’m maintaining my wide berth. 

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Deliveroo Holdings Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Flutter Entertainment (LSE:FLTR) has struggled over the past couple of months. This has been reflected in a downward move in the share price. Even though the shares are down around 26% over one year, most of this move (24% of it) has come in just the past three months. Yet with a potentially promising outlook for next year, I think that Flutter Entertainment shares could be a good discount buy for me right now.

Short-term struggles

It hasn’t been easy going for Flutter of late. Q3 results released in early November did show some good growth, but it also saw the business cut its full-year guidance.

For example, adjusted EBITDA was cut from previous projections of £1.27bn-£1.37bn to £1.24bn-£1.28bn for the group, excluding the US. In the US, Flutter now expects a loss for the year at the higher end of the previous guidance. It spoke of unfavourable sports results as a key factor in October that contributed to this revision lower in numbers for the year.

Aside from the numbers, Flutter Entertainment shares also fell as a large number of MPs have been lobbying for a review of gambling laws in the UK. In late November, an open letter was submitted by MPs to push for more stringent limits as more than 55,000 children (11-16 year olds) are now claimed to be gambling addicts. 

Any tightening of restrictions would mean a revenue negative hit for Flutter, so the shares dropped on this news.

Reasons to be positive

The above points have pushed Flutter Entertainment shares down over the past quarter. But I think that they’re starting to be attractively priced. I note the concerns raised above as potential risks, but I do also see plenty of reasons to be positive.

For example, the business recently said it’s buying online bingo operator Tombola for £402m. This deal is expected to complete in Q1/Q2 next year. I think this is a smart move as it gives Flutter a more diversified range of companies within the group. With PaddyPower and BetFair concentrating on the sports market, having a more traditional casino company should help to spread risk. After all, with negative sports results being flagged in the Q3 report, Tombola revenues should help to balance this out if issues are still there in 2022.

Another reason why I think Flutter Entertainment shares could do well next year is continued growth in the US. In the most recent results, US revenue for the first nine months of the year was up 85% versus 2020. America is a huge and potentially lucrative market for the firm. If Flutter can continue with the current strategy, then I’d expect this growth to continue next year.

Overall, I think that the recent dip in the share price represents a good opportunity for me to buy. I’m considering doing so at the moment. There are risks around recent results and potential restrictions. But I feel the potential rewards from the US and new acquisitions should outweigh these.

Jon Smith and The Motley Fool UK have no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Penny stocks are companies whose shares are valued under £1. These companies are often new and can be quite small when compared to the bigger players on the market. Sometimes they are simply worthless. But other times they are incredible opportunities.

Finding good penny stocks

The trick is to understand the business then calculate whether there is a wider market for what it’s offering. Is it currently underutilized, or has it reached its potential? Does the business need to change to survive?

For example, Zephyr Energy, a mining and petroleum investment firm, trades on the LSE for 7.29p today. But does the future look good for petroleum products? Recent fuel shortages may have pushed up the price of oil but the climate crisis requires that these companies become a thing of the past. Zephyr could pivot more to rare mineral mining, but it simply doesn’t look like it’s worth the risk to me.

A potential winner

By comparison, the world continues to invent new need for tech and data collection. The historian and writer Yuval Noah Harrai has written extensively about how data will become the vital resource of the future and we have seen how companies that trade in it have become some of the most valuable on the planet. Most tech companies already cost hundreds or even thousands of pounds per share but the UK’s own Idox Group (LSE: IDOX) currently trades for just 69p. This is up 20% from 49p this time last year.

Idox Group develops specialist software for government and industrial uses. Just a few days ago the Comhairle nan Eilean Siar (Western Isles Council) in Scotland began using software designed by IDOX to collect building and planning data on the local area and there are now further moves to integrate this software into the Scottish national government.

Anyone in the modern workplace knows how quickly tech solutions become entrenched in I.T infrastructure. Once it becomes entrenched, it then holds a near guaranteed recurring income for years or even decades to come. We can see this already in action at Idox. Between financial year 2020 and 2021, more than half of its revenue (£17.1m) came from recurring customers.

If this local council project goes well and we see further adoption by others around the country, then I think Idox has a good chance of breaking out of the penny stock range.

Risks and reward

The biggest risk I can see is that, right now, Idox has a razor thin profit margin. This may be down to it being a relatively new company and it still allocating capital to growth. Just this year it acquired Aligned Assets, another UK-based software company.

But if these investments don’t pay off, it could quickly fall back into being unprofitable. Such are the risks with penny stocks.

However, Idox has expanded its operations overseas and continues to offer its services to private companies and institutions. I’m focusing on government contracts as they are very lucrative and, once adopted are usually hard to dislodge. Idox currently makes 77% of its revenue from the public sector, but potential expansion into the private sector should not be ignored.

Provided Idox can beat out the competition and hold onto its contracts, the potential for growth domestically and overseas seems exponential.

I’m eager to add it to my portfolio.

James Reynolds has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

The earnings outlook for British banks like Lloyds Banking Group (LSE: LLOY) is becoming increasingly bleak. Growth has flatlined as the pandemic drags on and inflation surges. The threat posed by Covid-19 variants means things could get much worse before they get better too.

Official statistics on Friday showed the UK economy grew just 0.1% in October. This was down significantly from 0.6% in September. The most worrying aspect is that these figures fail to reflect the impact of the recently-discovered Omicron mutation. Indeed, the introduction of Plan B restrictions by the government poses a significant threat to the recent recovery.

Maike Currie, investment director at Fidelity International, said that “the steam has well and truly been taken out of the UK economic recovery.” He noted that “supply chain issues, worker shortages and surging inflation [have] put the dampeners on growth.”

Currie added that “the path ahead is becoming increasing difficult to navigate” as uncertainty lurks.

Is Lloyds in trouble?

The worry for Lloyds isn’t just that revenues could sink and bad loans rise as the economy struggles. It’s that much-awaited Bank of England (BoE) rate hikes could be kicked into the long grass as policymakers seek to support business. Low interest rates reduce the profits that the likes of Lloyds can make from their lending activities.

BoE policymaker Michael Saunders said last week that “there could be particular advantages in waiting to see more evidence on [Omicron’s] possible effects on public health outcomes and hence on the economy.” The BoE had been tipped to raise its benchmark from record lows of 0.1% as soon as next week.

This is particularly problematic for Lloyds as it has no foreign exposure to help counter problems at home. Its considerable exposure to the rock-solid housing market provides some reasons for optimism. So do the steps it’s taking to cut costs and attract customers by investing in digital banking. But, for me, these qualities don’t compensate for the colossal dangers facing Lloyds.

2 FTSE 100 shares I’d rather buy

So while Lloyds’ share price looks mighty cheap — at 46.8p, it trades on a P/E ratio of 7.4 times for 2022 — I believe that its low valuation reflects the prospect of weak profits growth in the near term and beyond.

Besides, there are plenty of what I consider stronger FTSE 100 shares for me to choose from today. While HSBC for instance suffers the same problem of prolonged low interest rates, I think its huge exposure to fast-growing Asian economies could generate excellent shareholder returns. This bank also trades on a low P/E ratio for next year, at 9.1 times.

I’d also rather buy gold miner Polymetal International, a UK share whose profits I think will rise as inflationary pressures boost precious metals prices. This FTSE 100 share trade on a P/E ratio of 7.1 times for 2022, a price that more than reflects the unpredictable nature of metals production. Oh, and one final thing, it’s 9.1% dividend yield for next year beats Lloyds’ 5.5% reading by a huge distance.

Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended HSBC Holdings and Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Dividend stocks are a great way of generating a decent passive income. And I think 8.9%-yielding Taylor Wimpey (LSE: TW) could be one of the best FTSE 100 stocks to buy to make a lot of cash. It’s why I already own the housebuilder in my Stocks and Shares ISA today.

Make no mistake, the chronic supply and demand imbalance that’s driving property prices to the stars isn’t going to be cured any time soon. Government has talked tough on creating 300,000 new homes a year by the middle of the decade.

But signs are growing that it’ll miss this target by some distance. At the same time, a blend of low interest rates and Help to Buy support for first-time buyers is electrifying homebuyer demand.

All this bodes well for Taylor Wimpey’s profit margins looking ahead. Yet it’s my opinion that the builder’s P/E ratio of 8.9 times for 2022 fails to reflect this bright outlook. I’d buy the business even though spiralling building material costs pose a risk to earnings.

8.9% dividend yields!

Imperial Brands (LSE: IMB) also seems to offer terrific value for money. Its 8.9% dividend yield for the financial year ending September 2022 puts it in the top five FTSE 100 biggest yielders. On top of this, the tobacco titan trades on a forward P/E ratio of just 6.4 times.

For my money though, Imperial Brands has the hallmarks of a classic value trap. The business might be able to keep paying big dividends in the short term. But I don’t like its credentials as a way to generate a long-term passive income, given the uncertain outlook for its end markets. The global fight against tobacco continues to heat up and New Zealand just announced plans to outlaw the sale of tobacco to young people.

It’s possible that Imperial Brands’ decision to manufacture vaping products could offset the steady decline of its traditional combustible goods. But this isn’t a chance I’m willing to take.

Another FTSE 100 dividend hero

There’s no question that Rio Tinto (LSE: RIO) carries an element of risk for investors like me. I am worried by signs that the economic rebound following coronavirus-battered 2020 is running out of steam. This could have serious implications for commodities demand in the near term and beyond.

Still, it’s my opinion that Rio Tinto’s share price bakes in these threats. For 2022, the mining giant trades on a P/E ratio of 7.2 times. This is well inside the widely-regarded value sector of 10 times and below.

The main attraction of Rio Tinto to me is its 9.8% dividend yield for next year. Yields could fall back from these elevated levels if the global economy indeed begins to cool.

But I still think the FTSE 100 firm could remain a brilliant way make a passive income as rising investment in green technology kicks off a new commodities supercycle. I think Rio Tinto’s profits could soar as demand for its copper, lithium, borates and the like picks up.

Royston Wild owns Taylor Wimpey. The Motley Fool UK has recommended Imperial Brands. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Stock market volatility has returned with a vengeance since the appearance of the Omicron virus variant.
 
Markets around the world slumped a week on 26th November. The UK’s FTSE 100, for example, dropped 3.6% on the day. And trading continued to be volatile in the following weeks, as investors wrestled with the latest turn in the coronavirus saga.
 
Still, the Footsie remains well above ‘correction’ territory (a fall of 10% to 20% from a recent high). But there’s clearly a good deal of nervousness among investors and some fear of a full-on crash.
 
Indeed, there are individual stocks that have fallen far further than the overall market since Omicron arrived on the scene. Although also some that have made gains.

Winners

BT‘s share price ended last week 4.8% higher than its level before ‘Omicron Friday’ — making it the FTSE 100’s standout performer over the period.
 
The price was buoyed by a report in the Economic Times that Indian conglomerate Reliance Industries, which failed to get its hands on T-Mobile’s Dutch unit earlier this year, was now weighing a bid for the UK telecoms group. Although Reliance subsequently denied any intent to do so, it did little to dampen investors’ enthusiasm for BT’s shares.
 
Looking at BT and the Footsie’s more modest ‘winners’, I don’t see too much going on sector-theme-wise. But it’s a different story at the other end of the risers-fallers table.

Losers

British Airways owner International Consolidated Airlines was the FTSE 100’s biggest sufferer. Its shares slumped 14.7% over the period BT gained 4.8%. Jet engine maker Rolls-Royce (-9.2%) and GKN Aerospace owner Melrose (-10.3%) were also heavy fallers.
 
Hotel stocks were sold off too, with Premier Inn owner Whitbread down 7.2% and international multibrand owner InterContinental dropping 9.9%. Cruise ships operator and former blue-chip stock Carnival fell 14.3%.
 
In other travel and leisure sub-sectors not represented in the FTSE 100, mid-cap pub groups — Mitchells & Butlers (-8.5%) and J D Wetherspoon (-8.6%) — were hit. Cinema chains Everyman (-6.9%) and Cineworld (-8.5%) were also unloved. As were stocks in other leisure niches, such as Gym Group (-12%).

Market crash ahoy?

Unsurprisingly, the sectors and stocks that have come under the cosh since the Omicron variant appeared are the same as those that spearheaded last year’s market crash on the emergence of the original virus.
 
Uncertainty and fear in the markets (and in the wider world) have returned, but nowhere near at the levels in the early months of 2020. Still, that doesn’t mean we won’t see another crash.
 
A current trend of tightening restrictions on international travel — as well as in leisure and hospitality settings in a growing number of countries — could be highly damaging for businesses in those sectors. And the contagion could spread to other parts of the economy.
 
Somewhere along the line, stock markets could crash again.

Strategies

Here at The Motley Fool, our core investment philosophy is to seek long-term ownership stakes in businesses with durable competitive advantages that are capable of producing high returns on shareholders’ equity without employing excessive levels of debt.
 
However, I know many Fools run other strategies alongside the core long-term-buy-and-hold philosophy. One I’ve used myself at times is to look for value among the most beaten-down stocks in a market crash.
 
These businesses may not have the best margins in the world or the most conservative levels of debt. Indeed, vulnerabilities in these areas are likely to be part of the reason they were so beaten-down in the first place.
 
However, on an improving economic outlook and positive shift in market sentiment, they can deliver some of the strongest returns for investors. And once the value they had has been ‘outed’, they can be sold.

Taking stock

I didn’t buy any such stocks during last year’s market crash. But if I had and was still holding them, I’d be asking myself a number of questions today. After many have made big gains, am I comfortable with the level of exposure I now have to this species of stock?
 
Could the company afford the interest on its debt in the event of another economic downturn? Does it have any borrowings that are due for repayment in the next 12 months? And how much upside potential do I see today, weighed against downside risk?
 
With the Omicron virus variant spreading, rising inflation rampant, and higher taxes coming over the horizon, I wouldn’t want to be exposed to too many lower-quality businesses in vulnerable sectors at this stage.

Graham doesn’t own any shares mentioned in this article. The Motley Fool UK has recommended InterContinental Hotels Group, Melrose, and The Gym Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

If I had to invest a lump sum of £10,000 today, I would follow the investment strategy laid out by Warren Buffett. He is widely regarded as the world’s greatest ever investor.

Over the past seven decades, he has turned an initial investment of $100,000 from friends and family into a conglomerate worth more than $700bn. 

His strategy for finding investments is relatively simple. He is looking for companies with a substantial competitive advantage, which will help them achieve robust profit margins and returns on invested capital year after year. 

Unfortunately, it is easier to describe this strategy than follow it. It is all very well to say that I should be looking for corporations with a strong competitive advantage, but constant change is the only constant in the world of business.

Companies are constantly evolving and changing. Competition is rife, and no business can take its position in the market for granted. 

This is why Buffett recommends that investors buy low-cost index tracker funds rather than trying to pick stocks. I must admit, this strategy is tempting. 

However, as I enjoy studying businesses and picking stocks, it’s not something I really want to follow. 

Warren Buffett investments 

Therefore, I would invest £10,000 in a basket of companies that I believe have robust competitive advantages. More importantly, I am looking for businesses that invest large sums in maintaining their position in the market. 

One company that really stands out is Reckitt. This business owns a portfolio of well-known consumer brands. These tend to command a premium over competitor products, which enables Reckitt to report market-leading profit margins. 

More importantly, the company recently laid out plans to invest a minimum of £2bn every year in research and development. This strategy aims to ensure the group stays ahead of the competition and maintains its competitive advantage. That said, Reckitt’s competitive edge should not be taken for granted. If the company understands its large peers, sales growth could start to lag. 

I already own this stock in my portfolio for the reasons outlined above and would be happy to buy more. 

Unique business 

Around five years ago, Buffett acquired the metal fabrication firm Precision Castparts. It produces unique components for the aviation industry and this remains its most significant competitive advantage. 

I believe Spirax Sarco exhibits similar qualities. The company designs and produces products for the control and efficient use of steam and other industrial fluids. It is also a leader in its field and has been for over 50 years. 

The company also invests significant sums every year developing new products, ensuring it remains at the top of the market. These unique qualities are the reasons why I would buy the stock for my £10,000 portfolio. The organisation seems to have some of the characteristics Buffett always looks for in an investment. Still, I will not be taking its growth for granted. The biggest challenge the firm has to deal with is quality. If the quality of its products declines, customers may go elsewhere. 

These two stocks would form the base of my £10k portfolio as they appear to have some of the best Buffett qualities of all UK shares. With these companies in place, I would be happy to invest the rest of the portfolio in a low-cost tracker fund, following the ‘Oracle of Omaha’s’ advice. 

Rupert Hargreaves owns shares of Reckitt plc. The Motley Fool UK has recommended Reckitt plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

With climate change being one of the most severe issues facing the world today, finding alternative sources of energy has become extremely important. This means that I’m very interested in several renewable energy stocks, which should see significant demand for the foreseeable future. NextEnergy Solar Fund (LSE: NESF) is my personal favourite.

Recent trading update

A few weeks ago, NESF released a trading update up to the end of September. Here it announced that its net asset value (NAV) per share had increased to 103.1p. This is a rise of nearly 8% since March 2021. As the share price currently sits at 100p, this means that the fund trades at less than its NAV. This is fairly rare for renewable energy stocks, potentially indicating that NESF is too cheap.

The group also added an extra five operating solar assets, taking the total to 99. This means that the total installed capacity has reached 895MW, a rise of nearly 10% since March. Hopefully, this will allow the fund to increase profits.

The future also looks fairly positive. Indeed, the Chairman of NESF, Kevin Lyon, has pointed to factors such as “unprecedented high power prices in the UK, global gas shortages, and the recent UN climate change conference” to show that the switch to solar energy is required. As a result, I view NESF as a long-term stock.

The dividend

The dividend is also a major positive for the group and this year it has been raised by 1.5% to 7.16p per share. This means that it currently yields over 7%, far higher than the majority of other UK stocks. It’s also higher than other large dividend renewable energy stocks, such as Greencoat UK Wind, which yields around 5%.

But I do have some concerns about the dividend. Indeed, the current cash dividend cover is just 1, compared to 1.2 in the same period last year. This means that if profits fall, the dividend is very susceptible to being cut. It also means that there’s no money left for reinvestment into the company. 

Why have I bought this renewable energy stock?

As mentioned before, I feel that company profits will be able to increase, especially because of the increasing necessity for solar power. Therefore, I hope that the dividend will stay at its current level, and there may even be scope for it to rise.

Recently, it also diversified into the energy storage sector through a £100m joint venture with the battery specialist Eelpower. This adds a new source of profits for the company, another factor that will hopefully support the large dividend.

As such, I bought shares in NESF as a solid income stock, which is also slightly undervalued, especially in comparison to its NAV. I may buy more shares at its current price.

Stuart Blair owns shares in NextEnergy Solar Fund. The Motley Fool UK has recommended Greencoat UK Wind. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

I’m searching for the best cheap UK shares to buy right now. Here are two sub-£5 stocks I think could help supercharge returns from my shares portfolio.

A FTSE 100 stock on my shortlist

Soaring demand for athleisure/sportswear has lifted JD Sports Fashion’s (LSE: JD) share price through the roof. At 225p per share, the retailer’s 40%-plus more expensive than it was a year ago. Yet, on paper, it still seems to offer exceptional value for money.

Forecasters think that JD’s earnings will surge 58% in this financial year. This leaves it trading on a forward price-to-earnings growth (PEG) multiple of 0.4. This is well inside the widely-regarded watermark of 1 and below that suggests a stock could be undervalued.

JD Sports is no flash in the pan. The FTSE 100 share is 250% more expensive than it was half a decade ago. Not only is it benefitting from soaring demand for people seeking out comfortable clothing. The company’s global expansion plan that has seen it enter the US more recently is also delivering exceptional rewards.

I’m also encouraged by JD Sports’ successful move into online shopping, one I think could light a fire under profits as the e-commerce boom continues apace.

Ok, fashion trends can change quickly and JD’s sales could rapidly fall out of favour with consumers but, at current prices, it remains a great cheap UK share for me to buy.

Another cheap UK share I’m considering buying

Video game developers like tinyBuild (LSE: TBLD) look set to have a bright future as demand for leisure software accelerates. The global games market is already bigger than the movie and music sectors combined. And the experts at Statista think it’ll be worth a shade below $269bn by 2025. That compares with the $178.4bn it’s currently valued at.

The ramping up of Covid-19 lockdowns across the globe could boost growth rates even further too. Gaming activity ballooned in 2020 as quarantined people searched for ways to entertain themselves. Turnover at the Overcooked and Hello Neighbor publisher soared 35% last year as a result.

I’m also encouraged by tinyBuild’s commitment to acquisitions to deliver future profits growth. Its latest foray saw it snap up US publisher Versus Evil and Sao Paolo-based games service provider Red Cerberus in November.

The move bulks up tinyBuild’s position in the RPG and strategy games genres and provides improved recruitment possibilities in South America.

A word of warning. The video games market is highly competitive and a disappointing review of a tinyBuild title could have serious ramifications for future revenues.

On balance though, I think tinyBuild remains highly attractive from a reward-to-risk perspective. At current prices of 195.5p per share, the software star trades on a PEG ratio of 0.6. At these prices I think it could be too good for me to miss. City analysts think earnings will soar 50% in this financial year alone.

Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.